The year was 1930. The greatest depression in US history closed around the nation like a dark shadow. Congress was desperate to do something that put the nation to work again. What could do it? Rep. Willis Hawley (R-OR) and Sen. Reed Smoot (R-UT) had a plan – close down imports and make Americans buy products made in America. Their plan, the Smoot-Hawley Tariff, raised import taxes on over 20,000 items to about the highest level they had ever been. Nations around the world responded with their own tariffs, starting with Canada, slashing all trade in and out of the US in half. Nearly everyone agrees that this made the Great Depression much worse everywhere.
Flash forward to 2013. Japan returns the Liberal Democratic Party to power on the promise to put the nation to work again. Their plan? Not to shut down trade, but to increase it – goosing exports by lowering the value of their currency and making their stuff cheaper.
The situations and the plans are very similar, but the underlying assumption is completely different. The world has passed from Nationalism to Globalism as the basic driving force. And that difference is worth thinking through.
The Japanese plan is not fundamentally different from standard practice around the world, but it is unique in scale and audacity. China has kept the Yuan (Renminbi) low for years to boost exports, as have many smaller nations. Incoming Bank of England Governor Mark Carney promises to drop the British Pound 15% for the same reason. Keeping a national currency on the low end of what the rest of the world will accept is very much standard procedure in order to boost exports and thereby jobs while keeping the net flow of cash into the nation.
Nations do not raise tariffs anymore thanks to a series of international agreements, enforced by the World Trade Organization (WTO). But there are similarities between tariffs and currency trashing as well as key differences. A thought experiment is in order.
Let’s say you live in Tariffania, a land that has jacked up import controls and generally been isolated by corresponding retaliation. Everything that is consumed in Tariffania is made there, guaranteeing jobs to the proud citizens. Luxury items like Italian wine, Korean phones, and US made snack cakes are simply unavailable. People generally do without, sometimes opting for the local booze, gadgets, and homemade cookies. What little does come in is very expensive, and to the extent anyone buys the stuff it contributes to some inflation. Life is a bit dismal, and only the rich have the good (imported) stuff. People who do have jobs save the Tariffania Auros (TFA) they earn in the factories because there is nothing better to do with it.
Now try living in Toiletpaperstan, a nation that prints their currency the Blech (TPB) like crazy. Imported goods are also expensive, so people don’t tend to buy them either. But the factories are humming making circuit boards for a Korean firm and the local whiskey is expensive only because so much is shipped overseas. The biggest problem is inflation, so people don’t save much. They tend to consume like crazy and everyone eats the local pastries from cafés rather than lose out at the local banks.
In some ways, their lives are the same – the stuff from the rest of the world isn’t a part of daily life. Both places are set up to benefit the working class. People tend to do without in both cases, but life is a bit better in Toiletpaperstan. It’s also more equal, since investments are very hard to come by and there isn’t much of a wealthy class. Those with serious money stash it away abroad and travel to find good times.
Why does this matter? Because that basic assumption of globalism that makes the TPB a largely worthless currency fuels a sense of equality that is more dynamic. A more conservative cynic would say that everyone is equal because they are all broke. But there is growth under the TPB that the people of Tariffania would never recognize. There just isn’t a lot of it.
This difference is important because of how it plays out in the long run. The TFA is comparatively stable, and their situation can continue as long as the population puts up with their lower standard of living. The TPB, by comparison, will eventually become so worthless that it has to default and everything starts over. Between 1967 and 1994 Brazil had no less than 6 new currencies introduced to replace the old ones that had failed. The result was chaos.
So is the new way of dealing with a depression that much better than the old way? The short answer is yes, but the long answer is no. If the nations pursuing the policies that are sparking a currency war can pull out of it before the collapse everything will be fine. That just doesn’t happen when the population becomes fat and happy – and it certainly can’t happen when there is one currency tied to other nations like they have in Europe. Greece, and to a lesser extent Spain and Italy, were caught trying to keep doing things the old way even though it wasn’t possible anymore.
Who can blame them? Well, the currency and bond markets do. What’s unique about the new way of keeping people employed is that it pretends to use market forces even while it gooses them constantly. Eventually, they have to go to the bankers of the world and beg forgiveness.
Were Smoot and Hawley right in the end? Not a chance. The world has changed, and for the better. Globalism does work, and it does even things out. Governments can work to spike their way out of a temporary bad situation, but they can’t rely on trashing their currency forever. Both methods fail because they do not look out for the long run – which is where so many governments fail today.